Crypto Academy / Season 4 / Week 1 - Homework Post for Crypto Professor @awesononso
Hi Steemians, I'm happy to be part of this 4th season of Cryptoacademy. Thanks to Crypto Professor @awesononso for the awesome lecture on Bid-Ask Spread.
Properly explain the Bid-Ask Spread.
Lets begin with explaining what Bid and Ask is, before the Bid-Ask Spread because the two terms (Bid & Ask) gave rise to the Bid-Ask Spread.
The term Bid price, is generally the price of goods a buyer wants to pay, it's usually the highest price the buyer wants to pay.
On the other hand, the term Ask price, is the price the seller wants to sell his/her goods. It is usually, the lowest price the seller wants to sell.
Now the Bid Ask Spread, this is simply the difference between the Bid and Ask prices.
Example:
Let's say I want to buy an xyz commodity with the Bid price of $9.9 and Ask price of $9.99.
For me to get this order, I have to pay the Ask price of $9.99. however, if they want to sell immediately, then I will I pay the bidding price.
As I said earlier, the Bid-Ask spread is the difference: 9.9 – 9.99= 0.09.
Why is the Bid-Ask Spread important in a market?
The Bid-Ask Spread is very important because of the following reasons:
The Bid-Ask spread is an important indicator of the liquidity level of a commodity. The less the Bid-Ask spread the more the liquidity.
The more the Bid-Ask spread, the more the risk of trading that commodity because, at the long run, you incur extra cost.
In other words, Bid-Ask Spread can be used to measure the risk in trading that commodity.The size of the Bid-Ask spread can also be an indicator of the direction of the market movement for that commodity. This helps in strategizing in that respect.
If Crypto X has a bid price of $5 and an ask price of $5.20,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.
Solution:
a.) The Bid-Ask Spread:
Bid price $5 – Ask price $5.20 = $0.20
b.) The Bid-Ask spread in percentage:
%spread = (Spread/Ask price) × 100
0.20/5.20 = 0.0385
0.0385×100 = 3.85%
If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.
Solution:
a.) The Bid-Ask spread:
Bid price $8.40 – Ask price $8.80 = 0.40.
b.) The Bid-Ask spread in percentage:
%Spread = (Spread/Ask price) × 100.
0.40/8.80 = 3.52
3.52×100 = 352%
In one statement, which of the assets above has the higher liquidity and why?
The crypto X has higher liquidity because, it has the smaller percentage of Bid-Ask spread.
Explain Slippage.
Slippage is a common phenomenon in the cryptocurrency trading business.
It is when an order is executed at a different price from the price at which it was initiated.
This is as a result of the movement in price between the time the order was initiated and the time the order was executed.
This can happen for a number of reasons, one of which is Order Size .
let's say I want to order 9 xyz commodity and 3 is available, automatically, I will have to slip through the order book until my order is filled. And as I slip through the order book the price will keep changing each of the time.
Explain Positive Slippage and Negative slippage with price illustrations for each.
A positive slippage happens when your order is executed at a more favorable price.
In a buy/sell order, a positive slippage happens when the order is executed at a lower/higher price than intended respectively.
Example: let's say a buy order was placed for xyz commodity at $100 and the xyz was executed (bought) at $95.
The positive slippage woud be:
$100 – $95 = $5 (gain)
A negative slippage happens when your order is executed at a less favorable price.
In a buy/sell order, a negative slippage happens when the order is executed at a higher/lower price than intended respectively.
Example, let's also say that a sell order was placed on xyz1 commodity at $50 and it was executed (sold) at $50.9.
The negative slippage would be:
$50 – $50.9 = $0.9(extra cost)
Summary.
Bid-Ask Spread is no doubt a strong indicator of the level of market liquidity that traders can take advantage of in their strategies.
Slippage is good or bad depending on who is at the receiving end, which is the general nature of the market.